GE reignites break-up talk after $11b insurance, tax hit

The ticker and logo for General Electric Co. is displayed on a screen at the post where it is traded on the floor of the New York Stock Exchange on June 30, 2016. (REUTERS/Brendan McDermid/File Photo)

NEW YORK — General Electric Co indicated it is looking closely at breaking itself up on Tuesday as the conglomerate announced more than $11 billion in charges from its long-term care insurance portfolio and new U.S. tax laws.

Chief Executive John Flannery has previously raised the idea of selling pieces of the largest U.S. industrial company, but went slightly further on Tuesday, saying GE is “looking aggressively” at a spin-off or other ways to maximize the value of GE’s power, aviation and healthcare units.

“I would categorize it as an examination of options and it’s (the) kind of thing that could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense,” he said in response to an analyst question on a conference call, without giving any details.

Flannery already is eliminating thousands of jobs and cutting $3.5 billion in costs as he tries to solve problems he inherited when he became CEO on Aug. 1, including falling sales of power turbines, a build-up of inventory and declining profit margins in some businesses. His turnaround effort is still likely to take a year or more to play out.

Some Wall Street analysts saw Tuesday’s remarks as a sign that GE may already have figured out valuation, timing or disclosure requirements for a spin-off.

“He got really explicit,” Deane Dray, analyst at RBC Capital Markets, said of Flannery’s remarks. “He named all the units and said we’ll look at structures that allow for a public company exit. If you’re looking for the break-up scenario, it’s still simmering on a front burner.”

Others saw more hurdles. While “a full-scale GE breakup may be in the cards,” it would have tax, corporate and research cost implications, said Jeff Sprague, an analyst at Vertical Research Partners.

“We think these comments point more towards the eventual split-off of (GE’s Baker Hughes unit) and actions such as a potential IPO of part of GECAS,” GE’s aircraft finance unit, Sprague said in a research note.

GE said it will provide another update on its review in the spring. A decision could come then, CNBC reported, citing sources close to GE, adding that a breakup was “likely.”

GE’s fourth-quarter $11 billion charge includes $6.2 billion after tax for reevaluation of insurance assets, $3.4 billion for U.S. tax changes and $1.8 billion for impairments of energy financing at GE Capital. The insurance charge was double what GE warned last year.

The charges means GE’s 2017 profit, to be reported next week, will be at the bottom end of its forecast of $1.05 to $1.10 a share, GE said.

GE shares ended down 2.9 percent at $18.21. At that level, the company has a market value of about $156 billion.

Insurance rethink

The insurance charge is the latest sign of problems with the modeling and funding of nursing home and other long-term care in the United States.

GE said a review with outside actuaries and accountants that ended late last week showed its portfolio of 300,000 policies needed $15 billion more in reserves to cover potential payouts, or about $50,000 per policy.

GE Capital will set aside $3 billion in cash in the current quarter and $2 billion in annual increments through 2024 to cover those potential costs.

GE said the Kansas Insurance Department — the primary regulator for North American Life & Health, GE Capital’s insurance portfolio — had approved the reserve payments plan.

The $15 billion set-aside highlights difficulties long-term care insurers and reinsurers face as they struggle to make good on policies dating back decades that underestimated projected healthcare costs and life spans.

GE’s policies stem from businesses it mostly acquired in the 1990s and sold last decade. GE said it has not written such policies since 2006.

The cost of nursing home or home-based elderly care tends not to be covered by Medicare, the U.S. government insurance program, and can be extremely expensive out of pocket.

Flannery said in November that GE would pare its operations to power, healthcare and aviation, and exit at least $20 billion in operations as it tries to shore up its financial performance. He also said further major portfolio changes were being considered, but was vague.

GE was the worst performer in the Dow Jones Industrial Average in 2017 and it has already cut its planned annual dividend for 2018 in half, only the third cut in the company’s 126-year history.

Even after the stock’s declines, it trades at only a slight discount to industrial peers, trading at about 18 times this year’s expected earnings.